As Facebook Continues Testing Credits, Some Developers Worry About Costs

As Facebook continues to experiment with its universal virtual currency, Credits, some developers continue to tell us that the product is going to lose them money — even as others say the opposite.

One issue is the flat 30% fee that Facebook takes from all Credits transactions on third party applications. But there other potential costs, that some in the industry say increases the total percentage to around 50% of their revenue, versus what they are bringing in now.

Facebook, however, believes that Credits will be a net win for developers, and not just a big new revenue stream for itself. Before we get into the details of what the real costs (and benefits) of Credits might be, here’s some more background.

The Place for Credits

The virtual goods market has boomed around the world in the past decade, mainly in Asia — but Facebook quickly becoming a leading platform for growth of companies based on the virtual goods model after it launched its developer platform in late May of 2007. Many people who use third party social games and applications, it turns out, are willing to pay for digital products in order to do things like win a competitive game or more beautifully decorate a virtual space.

This year, we expect the virtual goods revenue model in social games to bring in around $835 million within the US alone, with most of the money coming from Facebook apps. See our Inside Virtual Goods report for more research on the market.

For most of the history of the platform, Facebook has not taken any fee from developers on its platform. When it launched the platform, the company even told developers that they would be able to keep all of the revenue they generated from applications.

Most developers have built their own virtual currencies within their apps, that users can buy using credit cards or through a service like PayPal or earn through offers then use the currency to buy the goods. In many cases, apps will have one currency that users can buy, and another currency that users earn through taking actions within a game, like weeding a crop patch in FarmVille, cleaning the fishbowl in Happy Aquarium, etc.

Credits, in Facebook’s view, will somehow take a central role in this new ecosystem. The company said in April that “there’s just going to be one currency that people use” on Facebook — meaning Credits. It more recently said that it hasn’t decided if Credits will replace other options to be the only currency. At this point, one can observe a variety of Credits implementations in third party apps, from exclusive Credits usage within Crowdstar’s games, to Credits as one of several currency purchasing options in Zynga’s hit game, FarmVille.

The Cost of Credits

Some developers, as we have been chronicling for many months, either do not believe that Credits can actually make them more money, ever, or else do not believe that the long-term benefit is worth the near-term costs. Their main line of criticism now is that non-obvious costs that are adding up — especially if Facebook decides to exclude other currencies. Here are the main issues:

Breakage: This industry term means that users pay for an amount of virtual money, but abandon it after a period of time, and thereby forfeit it to the company — outside of Facebook, this often happens with unredeemed gift cards, for example. On Facebook, users will sometimes purchase currency within an app but then, for whatever reason, never use it to buy virtual goods. This form of breakage can account for up to 25% of revenue in some applications, according to industry sources.